An in depth analytical look
at the real estate market
in Houston and surrounding areas.

Wednesday, March 1, 2017

Zillow Breakeven Horizon Report

Mortgage interest rates are rising. Apartments rents, at least at the
high end, are falling. And oil prices are heading up, bringing
confidence in Houston's housing market along with it.
So, is it better to buy a home or rent?

A new study by real estate listing and information firm Zillow says
if you plan on staying put at least two years, buying may be the better
option.

Zillow's Breakeven Horizon report says buying is more cost effective
than renting in Houston once you've stayed in place for 1 year and 11
months. The report factors in things such as expected rent increases,
price-to-rent ratios, home repair costs, interest rates, and even what
you would make as a renter investing your down payment elsewhere.

Some local realty experts think the Zillow break-even point may
be too optimistic. Will Holder, president of Trendmaker Homes,
estimates it would take at least three years to break even based on
typical trans-action costs of 10 percent to buy or sell a home. Those
costs include things like sales commissions and closing costs.

In Zillow's report, however, Houston mirrored the nation's break-even
point of just under two years. That's almost six months longer than it
was a year ago, according to Zillow.

"We don't expect home prices to be increasing as quickly, which is
why the break-even has lengthened," Skylar Olsen, senior economist at
Zillow, explained.

The Zillow study is based on an average rent of $1,560 a month at the
end of 2016, which fell 1.5 percent for the year and is projected to
drop slightly this year. That factors in both apartments and houses.
Homes in the Houston market appreciated 6.6 percent in 2016, and Zillow projects that number to fall to 3 percent in 2017.

Often, it all boils down to location. In more expensive parts of the
U.S. such as San Francisco and Los Angeles - where the cost to buy is
high and appreciation has leveled off - it will take longer than the
national average of just under two years to break even. It could take
more than four years, according to Zillow.
In pricier areas, such as West University and Hunters Creek Village,
break-even points are similar to the hottest West Coast markets. That's
because it takes a while to recoup the higher transaction costs.
Buyers also can expect longer-than-average times to break even in
some northwest regions of town such as Cypress and Tomball, according to
Zillow, while those in Pasadena and Baytown are quicker.
Areas with good schools, a short supply of houses for sale and rising prices do best.

"If you're buying a brand new home where you could sell it and break
even, it used to take six or seven years to get that done," said Shad
Bogany, a broker associate with Better Homes and Gardens Real Estate
Gary Greene.

"Inside the Loop, we're seeing people making money even after owning
six months. It just depends on where it is. The king is still location."

Today, buyers may be able to find deals on new homes as the market
works through an oversupply that resulted from builders ramping up when
Houston was adding 100,000 jobs a year before oil prices collapsed.
There are about 1,300 completed new houses available in the Houston
area, compared with 800 in a normal market, according to Holder of
Trendmaker Homes.

"It's kind of a window of opportunity for home shoppers that are interested in new homes," Holder said.
Holder has seen a change in attitudes among buyers as oil prices rose past the $50 mark.
"A year ago, when oil was headed for $30 a barrel, people were afraid
they were going to lose their job," Holder said. "There was a lot of
reluctance in the market."

Despite concerns about the economy, Houston area single-family home
sales reached an all-time high of 76,449 in 2016, according to the
Houston Association of Realtors. Prices rose too, with the median
gaining 4.5 percent to $221,000.

While new homes may be plentiful, Houston's supply of homes for sale
overall is not. The current 3.3 months of inventory is well below the
six months of inventory considered to be a balanced market.

Rising interest rates won't help that, according to Bogany, as
homeowners will forgo moving up to larger homes because they don't want
to give up their low-interest-rate loans.

"The greatest obstacle to homeownership in Houston right now is about
finding the homes," Bogany said.

"The $150,000-to-$250,000 range is
probably the hottest market in Houston simply because that's where rents
are equal to what monthly payments are. It's still cheaper in Houston
to own something versus rent."